NBCC IPO – Building Gains

The State-owned National Buildings Construction Corporation has come out with an IPO at the fag end of the fiscal. The government’s bid to divest a part of its stake in this company offers a good opportunity for retail investors.

After miraculously scraping through the ONGC offer for sale via the auction route, the government has finally decided to go ahead with the initial offer of the National Buildings Construction Corporation (NBCC) just shy of the fiscal year ending date for 2011-12. The offer, through which the government plans to offload 10 per cent of its stake, opens on 22nd March, 2012 and will close on 27th March, 2012.

At a price band of between Rs 90-106 per share, the exchequer would look to garner an amount between Rs 108-127 crore by offering to sell 1.2 crore shares, wherein 120000 equity shares would be reserved for employees and the remaining shares would be for retail and institutional investors on a proportionate basis. One must note that retail investors would get an additional five per cent discount on the final issue price.

The NBCC, which is much alike the Central Public Works Department (CPWD) in terms of business dynamics, is engaged in the business of Project Management Consultancy (PMC) service for civil construction projects, civil infrastructure for the power sector and real estate development. Under all three verticals, the company has been undertaking construction work for government-owned companies as well as ministries. To read further on the business front, readers can refer to our previous update on the company dated 29th February, 2012 on our website www.dsij.in (NBCC to launch IPO in this fiscal).

With the PMC segment contributing 97 per cent of the total order book size of Rs 10622.6 crore and 93 per cent of total revenues as on 30th September, 2011, it is needless to state that the company’s growth would primarily be driven by the growth in the PMC business. Having already completed 43 projects, the company has 130 ongoing projects and an additional 59 in the pipeline that are slated to be executed over the forthcoming two-three years. This provides fair revenue visibility. The NBCC has also extended its footsteps overseas by executing a few projects through foreign JVs. It is currently executing a project in the Maldives.

The only concern for the company comes in the form of its high dependence on the government and its various entities for order inflows. Any drastic change in government policies towards public private partnerships as opposed to its nomination basis may adversely affect its growth prospects.

We believe that going forward, with the increased demand from state and central governments for projects related with the construction of hospitals and roads as well as the impetus to urban and rural development through schemes like JNNURM and PMGSY, NBCC, with its preferred status, would largely stand to benefit.

The company’s growth would also be fuelled by the real estate business. Backed by a land bank of 125 acres, the company has 19 upcoming projects in the residential and commercial sectors. These are well spread across the North-Eastern belt of India, including Kolkata, and will be completed over the coming two-three years. The demand shift towards affordable housing in the Tier-II and Tier-III cities, coupled with the government’s focus on growth in these areas, would ensure a good order flow for the company in the times to come.

On the financial front, the company’s topline and bottomline have recorded a CAGR of 21 per cent and 15 per cent respectively over the past five years, showcasing decent growth. It is debt-free and has maintained a healthy dividend payout ratio of 20 per cent. The ROE and ROCE also stand comfortable at 23.5 per cent and 35.8 per cent respectively.

On the valuations front, the company looks attractive at a price band between Rs 90-106 per share, which discounts its annualised EPS of Rs 12.5 at a PE of 7.2-8.48x. With a cash reserve of Rs 1368.1 crore as on 30th September, 2011, the value per share works out to Rs 114 a share.

We are confident about the business prospects of the NBCC, and recommend that investors subscribe to the issue with a long-term investment horizon.